[lsiq]

"When someone buys a building to lease out flats, is that not productive?"

That is simply Joe's $10M building leasing out flats has now become Sally's $12M building leasing out flats. Unless Sally makes productive investments in renovations and so on, there is a net zero gain to GDP but there is asset price inflation as a result of the bank's credit creation. If the bank instead loaned $12M to Sally to build a new identical building, there would be twice as many flats available for renters, the local builders would have work for several months, and the building materials manufacturers would make sales. Joe may have to sell his old building for $9.5M instead, but he may have slightly better rents as the local economy added jobs. And the bank, in the end, should even earn a higher rate of interest from Sally.

"it's the fault of those speculators for the speculating, not the banks." Both the speculators and banks respond to financial incentives and must work within the laws.

"This idea you have about what is a 'productive investment' or not is fairy interventionist." Is it any any more interventionist than regulating the bank so that they can't make loans to borrowers who can't pay? Or that they cannot finance new coal plants? Or that they must report all transactions over $600?

It is inevitable that banks will eventually only loan for productive purposes. If we still have a working banking system in 50 years, that is how it will work.

[imtringued]

But at least in the US mortgage origination is heavily influenced by the fact that Fannie Mae will buy the mortgages which means the banks don't really care whether new construction is being funded or old buildings are being bought at yet a higher price.

Just looking at the commercial banks alone won't get you the high level picture.

[jasmer]

Landlords provide an economic service, in fact for most of them it's not just arbitrage.

"It is inevitable that banks will eventually only loan for productive purposes."

They will always lend to those who can pay them back with the least risk at the highest rate. That's it. Productivity is a second order thing and it will always be second order.

[lsiq]

Productivity is indeed a second order thing in the way the banking system works now. But you still have not understood my point.

As long as IT IS LEGAL for banks to create credit for non-productive existing-asset purchases, there is a limit to infinity function applied to the economy that leads to consolidation of all assets with ex nihilo money. The banking system as it exists now leads to a future where one hypothetical private equity firm will have purchased all assets in the economy with bank created money (in practice, it will simply be government/central bank ownership).